A pilot project which tested capitation payment for pharmacy services in the Iowa Medicaid Program was completed on June 30,1978. Employing a pre:post, experimental-control design, significant increases in the rates of generic substitution and OTC drug use were observed under capitation, as well as increases in the average number of days' therapy per prescription for maintenance drugs. These changes resulted in significant decreases in the average ingredient cost of a day's drug therapy and the average drug expenditure per Medicaid recipient. No significant differences were noted in the quality of drug therapy. Potential administrative savings and pharmacist approval of capitation were documented. Phase two expands capitation to 32 counties of Iowa and emphasizes: (1) urban areas; (2) efficient administrative mechanisms; (3) capitation rate-setting; (4) pharmacist education regarding capitation; and (5) devices for prompting appropriate pharmacist performance. If the results of the expanded project are favorable, capitation may be expanded to the entire state of Iowa by February 1, 1982.